Case Study

Summary

• FAMILY BUSINESS FACES IMMEDIATE LIQUIDATION BY INLAND REVENUE
• APPROACH BRA FOR FREE ADVICE & ASSISTANCE
• FREE BUSINESS REVIEW CARRIED OUT AND ALL PROBLEMS IDENTIFIED
• SOLUTIONS IDENTIFIED
• LETTER OF ENGAGEMENT FOLLOWED BY IMMEDIATE STEPS TO SAVE THE BUSINESS
• LIQUIDATION AVOIDED
• REFINANCING SOURCED AND PROVIDED
• IMPROVED ACCOUNTING AND BUSINESS SYSTEMS INSTALLED
• PROFITABILITY RECOVERED
• CURRENT NEGOTIATIONS FOR TAKEOVER OF COMPETITOR
• CONTINUING ADVICE & ASSISTANCE TOWARDS ACHIEVING 5 YEAR OBJECTIVE OF BUSINESS SALE OR MBO.

The full history, solution and results

• A family owned business, “Chariots on Fire Ltd”, operating as a private hire coach/transport business.
• Under severe pressure from a number of creditors, in particular the Inland Revenue, who had already presented a winding-up petition which was due to be heard within 10 days.
• On becoming aware of this, its accountants referred the directors to BRA, as providers of specialist assistance, on a project management basis.

FREE BUSINESS REVIEW

 BRA attended the Company’s premises, during which the following issues and objectives were identified:

• The directors had in recent months embarked upon a process of refocusing the business from a combination of cold call private hire and contract work, to concentrating solely on its contract based operations. 
• This had represented a strategic decision, to reduce the inefficiencies within the business caused by the funding of down time of staff and vehicles, and thereby reducing operating costs.
• Although a “business plan” and financial forecasts had been prepared, which suggested that this strategy had long term benefits for the Company, the existing management had substantially underestimated the short-term financial exposure of the business.
• As well as undertaking a complete structural and financial review of the business BRA also considered the merits of this “business plan” from which a number of areas were identified that would impact upon the long term viability of the company. Accordingly appropriate modifications to the business plan were recommended by BRA to the management and these were subsequently integrated into the framework of the plan itself. 
• Historical annual turnover levels had been approximately £3 million, however turnover had declined by over one third.
• As a consequence of such a dramatic fall in turnover, the policy of restructuring the company’s overheads was unable to keep pace with the decline in income. The restructuring itself had had a significant cost impact on the business, such as redundancy payments, and this further exacerbated the cash flow difficulties being experienced.
• The existing reserves and capital base of the business were insufficient to accommodate the level of losses being sustained by the company in such a short period of time in addition to its ongoing cash requirements.
• The management had not allowed for such a downside when implementing the business plan and had therefore made no provisions for additional funding for the business.
• The company’s Bankers had historically provided only limited support to the business by way of an expensive £50,000 overdraft facility at a rate of 4% over Bank of England base rate. This facility was secured by way of a debenture over the entire assets of the Company. Although the directors had held discussions with the Bank with regard to extending this facility, due to its current financial position and poor recent record in managing its account, the Bank was not prepared to assist.
• The directors and shareholders were not in a position to support the business any further. As a consequence of its deteriorating financial position, it had accumulated liabilities, principally to the crown departments, of amounts in excess of £120,000. These sums were payable within 10 days in order to avoid liquidation.

Stakeholder/Management Objectives

• Given that the petition for the winding up of the company had been issued by the Inland Revenue, the primary objective was to avoid liquidation and secure the immediate survival of the business.
• Once survival had been achieved, co-ordinated implementation of the modified business plan was required to return it to profitability.
• The ultimate objective was to grow the business over a five year period for subsequent sale or potential MBO of the principal shareholder by other family members involved within the business.

Formal Exit Meeting/Letter of Engagement

The issues identified above by our free review, together with potential routes for recovery, were discussed with the management at a formal exit meeting. Following this, BRA provided a formal letter of engagement to the Company clearly detailing the scope of instructions and the basis of future fees. Following receipt of a signed copy of the letter of engagement, BRA provided a formal written report confirming its findings and detailing the proposed strategy recovery. Steps were then immediately commenced to implement the strategy, which initially focused on ensuring the survival of the business, before moving on to the medium to long-term objectives of implementing the business plan as modified by BRA and accepted by the management with a view to returning the Company to profitability.

THE STRATEGY

Short Term – Survival Of The Business

• BRA immediately made contact with the Inland Revenue and an adjournment of the winding-up petition was agreed to provide time to prepare proposals for the settlement of the PAYE/NIC liabilities. These liabilities exceeded £120,000.
• In order to establish the immediate and short-term cash requirements of the business BRA prepared daily profit and loss, cash flow and balance sheet projections on the basis of current income and overhead levels. Monthly forecasts were also prepared on a medium and longer term basis.
• A detailed analysis of the company’s balance sheet was undertaken to evaluate potential financing opportunities. From this the following opportunities were identified as being potential methods to bring cash into the business in order to deal with its pressing cash flow problems.
  • The company owned a number of vehicles outright, against which finance could be raised.
  • The company also operated a clean sales ledger, against which a factoring or invoice discounting facility could be arranged.
• A number of Members of the BRA financing team specialising in asset finance, factoring and invoicing discounting were introduced to the management of the Company on a no obligation basis. Each was requested to provide formal quotations as to the level of funds that could be generated from these facilities together with the details of the costs and the security required.
• Highly competitive offers in principle were received within a 24-hour period from all financiers introduced to the business. The management agreed on a new invoice discounting facility and the refinance of a number of its wholly owned vehicles. Cash generated was sufficient to repay the outstanding overdraft facility as well as providing sufficient funds thereafter to enable BRA to structure an acceptable payment plan with the Inland Revenue, whilst still providing sufficient cash to meet the anticipated cash requirements in implementing the new business plan.

Medium Term

Inland Revenue Repayment Plan/Review and Implementation of Business Plan

The scope of BRA’s instructions in relation to the business plan comprised of the following:

With the short term survival of the business having been secured the company retained BRA on a monthly consultancy basis to implement the agreed modified business plan and also to ensure that the repayment agreement reached with the Inland Revenue was strictly adhered to.

• Integration of new accounting package with existing transport software, enabling more effective monitoring and control of the business. -
• Following introduction of improved operating systems, structured rationalisation of certain direct and indirect overheads with the ultimate objective being to increase gross profit margins.

This enabled the existing management to concentrate on their respective areas of expertise, such as generating new contract business at competitive but profitable margins.

Long Term

The company has now achieved its short and medium term objectives, the Inland Revenue debt having been fully discharged, and the business is now trading profitably. BRA continues to work with the company towards its 5 year objective of growing the business for subsequent sale or MBO, and is actively involved in negotiations for the acquisition of a direct competitor.